Tax planning based on expected changes to the tax law, but they don’t happen? What to tell your clients

The announcement of proposed retrospective legislation, as well as proposed legislative changes that do not eventuate for much longer than expected, pose a dilemma for affected taxpayers. Should they follow the existing law or anticipate the proposed change?

Naturally, the best advice for most clients would be to not act on an anticipated change to the rules until the ink from the official stamp has dried, but it is not entirely unheard of for some to be so enthused enough (or indeed fearful) about an expected change in tax law that they jump in feet first.

Right now there are several pieces of legislation that seem to have lost their way somewhere in Canberra. The current impasse over the proposed SG amnesty could be an example, if affected employers have been keen to clear up their obligations.

Perhaps a better example could be the proposal to remove the entitlement to the capital gains tax main residence exemption for foreign residents. There are so many scenarios with this proposal that could create difficulties (for non-residents of course, but also for “mobile” residents). Affected clients may be clamouring for advice on what they should do, or what Plan B they can line up behind their Plan A.

Also, what are the consequences if a change doesn’t go through, and our ants-in-their-pants client has already requested certain transactions be made or arrangements put in place anticipating a certain tax outcome that simply does not eventuate?

There is at least some form of preparedness afforded by the ATO in its stated approach to the administrative treatment of taxpayers in these or similar situations.

If a taxpayer self-assesses by anticipating an announced law change
If a taxpayer lodges a return or activity statement, anticipating an announced law change, and the retrospective law changes are as anticipated, the self-assessment will not be affected.

But if not as anticipated (for instance, because amendments were made to the relevant legislation during the parliamentary process), an amendment or revision to the return or activity statement will be required.

If an amendment or revision is made and:

it reduces their liability, the ATO will generally pay appropriate interest on any overpayment

it increases their liability,

generally no tax shortfall penalties will apply, on the basis that it is reasonable for a taxpayer to follow an announced government proposal to change the law and that the existence of such an announcement represents special circumstances

any interest accrued will be remitted to the base interest rate up to the date of enactment of the relevant law change

any interest in excess of the base rate accruing after the date of enactment will be remitted if the taxpayer actively seeks to amend assessments or revise activity statements within a reasonable time after enactment of the law change (the ATO says “a reasonable time” is to be determined on a case-by-case basis).

If the announced law change is not enacted
On rare occasions an announced law change may not be enacted – for example, because it is rejected altogether by the Parliament.

Some taxpayers may have lodged returns or activity statements anticipating the announced law change. Other taxpayers may have lodged and self-assessed under the existing law but delayed payment of a liability in anticipation that it would be removed by the announced law change.

In these cases the ATO says it will publicly advise tax agents and their clients that the law has not been enacted, explaining the relevant circumstances and the need for affected taxpayers to seek amendments to their assessments or lodge revised activity statements as necessary and make any consequent tax payments.

If a taxpayer needs to make an amendment or revision, the ATO says the interest and penalty consequences will be as outlined above, depending on whether they self-assessed by anticipating the announced change or not. The interest consequences for delayed payments will be similar, although the ATO says it won’t apply penalties.

Note however that these are general guidelines only and will depend on the law change announced. The ATO will usually release information with respect to the anticipated law change to provide guidance and its approach.